- The Washington Times - Wednesday, October 15, 2008

The Bush administration’s plan to spend up to $250 billion to bolster the U.S. banking industry comes with a built-in exit strategy - assuming the plan works as its designers hope.

President Bush described the massive market intervention as “limited and temporary,” and Treasury Department officials say they have included a number of features to encourage participating banks to buy out Uncle Sam’s stake as quickly as possible.

But analysts say the government has to walk a fine line. If the restrictions are too punitive, few banks will participate, undermining the fundamental goal of easing the credit crunch. And if the economy does not recover, it may be a long while before the government’s shares can be sold at a profit.

Financial institutions that participate in the voluntary program - starting with nine of the country’s biggest banks - will face restrictions on executive pay and dividend policy as long as the U.S. government has an ownership stake in the form of senior preferred stock.

“Banks have every incentive to work very hard to get their businesses back up to par, and return to normalcy,” White House spokeswoman Dana Perino said.

The Treasury’s shares will pay cumulative dividends of 5 percent for the first five years, then jump to 9 percent annually after that, encouraging banks to buy out the government’s stake ahead of time.

The preferred shares are also being used as bait to attract private money to replace taxpayer funds. Banks can only redeem the government’s shares in the first three years by raising capital by an equity offering in the private market. The Treasury Department will also get warrants giving it the right to purchase a limited number of common stock in the bank as well.

Banks will not be permitted to raise the dividend paid out to common shareholders for the first three years after taking U.S. funds, and the Treasury must approve dividend increases after that.

On executive salaries, participating banks will have to adopt new restrictions on pay packets and “golden parachutes” as demanded by Congress in the $700 billion Wall Street bailout package passed earlier this month. For example, companies that accept taxpayer money will not be able to deduct more than $500,000 in salary for each senior executive from their taxes.

Assuming enough banks participate and the global economy recovers, Treasury’s architects say the government will either be able to sell its share holdings at a profit or be bought out by the newly strengthened banks.

But there are already doubts about how many banks will participate, amid reports that Treasury Secretary Henry M. Paulson Jr. faced strong resistance from some of the initial nine recruits.

“Given that 95 percent of our banks are well capitalized, we would not expect most banks to participate,” said Edward L. Yingling, president and chief executive officer of the American Bankers Association.

The bank rescue package caps an extraordinary year of federal bailouts.

Even before the $125 billion commitment Tuesday, the Bush administration had provided nearly $30 billion to Morgan Stanley in the assisted takeover of Bear Stearns; pledged to buy up to $200 billion in preferred stock at teetering mortgage giants Fannie Mae and Freddie Mac; and put up $85 billion for an 80 percent controlling share of insurance giant AIG.

Adding in the $700 billion approved for the Wall Street bailout, the government potentially could wind up investing more than $1 trillion in the private sector.

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